Monday, November 30, 2009

An interesting, but at this stage purely theoretical conjecture that can play out in the next couple of days.

I will posit it after I go over the facts that led me to this conjecture:

Today's reporting on BofI and the banks in general has been focusing on the possible conversion of preference shares into ordinary shares to plug in capital holes. Considering that (a) such a conversion will de facto spell near nationalization of the banks; (b) it will destroy Government's case (supported by the stockbrokers and the banks) that preference shares represent significant cash flow positive back to the taxpayers in exchange for recapitalizations to date; and (c) such a conversion will amount to a swap of a guaranteed asset (preference share dividend) in exchange for of a falling asset (as ordinary shares are tanking and are bound to continue to tank if conversion takes place), the statement is alarming. In fact, the statement is extraordinary in nature, similar to the Banks Guarantee Scheme announcement back in September 2008;

The RTE has completely failed to explore the very core idea of what effect the conversion will have on both capital reserves at the banks and the value of taxpayers' shareholdings in the banks. This might suggest that the story was potentially heavily 'managed' as a staged release as RTE business editors and correspondents should have been aware of such consequences;

The extent of demand for capital post-Nama has been approximately estimable from the sheer size of impairments faced by the banks against banks balancesheets (loans to deposits ratios) and did not come as surprise for, say Anglo earlier this month. Why such a hype then all of a sudden? Did Nama haircut change dramatically? Not, Bloxham note today in the morning explicitly worked its estimates from the assumed Nama-signalled haircut of 30%. No change spotted here, then.

Core tier 1 capital already includes preference shares, so conversion will only aid the banks balancesheets if and only if it will allow the banks to keep the preference shares dividend. This means that taxpayers get nothing from these shares. And it also means that things are getting so desperate in the banks that they are having trouble (potentially?) repaying these dividends to the state. What can the impetus for such deterioration be, given both banks already guided recently on expected impairments? Why did RTE reporters never bothered to ask about this issue.

The whole mess of demand for post-Nama recapitalizations was predicted by some, and publicly aired in the media. In fact, my estimates from one month ago (here) accurately predicted the numbers involved. While some 'experts' from stock brokerages interviewed today by RTE's flagship News at Nine programme might have been unaware of such estimates back then, their arriving at the same numbers one month later is not really that much of a market-making news. So, again, why the hype today?

RTE stated tonight that the markets anticipated 20% haircut (here). This is simply not true:

Per today's Davy note: "This has been reviewed by NAMA and the Department of Finance and on the basis of interaction with both and the minister's estimate of €16bn of eligible bank assets, 'the directors believe that the average discount on disposal applicable to these assets should not be greater than the estimated average discount for all participating institutions of 30%'."

Bloxham are working off 30% assumption.

Goodbody's note was a bit more volatile on assumptions: "As per BOI’s recent interim results and a November’s IMS from AIB, both banks highlight that a number of uncertainties exist as to the specific quantum and timing of loans which may transfer, the price, the fees due and the “fair value” of the consideration. In its statement, AIB refers to the previously highlighted industry average discount of 30% to the gross value of the loans and indicates - as it did at the time of its IMS - that the board’s view is that “there is no reason to believe that the average discount applicable to AIB’s NAMA assets will fall significantly outside of this guidance”. When we wrote on this at the IMS stage, we highlighted that the language here was more vague than previous utterances and note our haircut applied is 28%. Similarly, in the case of BOI, the references in the release today are all based off the generic 30% industry figure referred to be the Minister, though that the discount will vary by institution, with the Court believing this industry figure to be the “maximum loss likely to be incurred on the sale of loans to NAMA”. We are of the view though that BOI’s haircut will be closer to 18%." I'll explain in human language: AIB itself believed that average Nama discount (30%) or something close will apply, while Goody believed 28% will do. For BofI, the management believed before that 30% will apply. But Goody's believed 18% will do (why, beats me). So no evidence on 20% market consensus anywhere here, then.

NCB applied 30% model to both BofI and AIB in today's note. And so on.

Taken over all brokers and banks themselves, AIB assumed discount averages at 29.5%, not 20%, BofI assumed discount averages at 27%. Now, forgive me, but where is RTE taking its 20% market expectation from?

So now, let us summarise the evidence:

Banks announcement today was out of line with ordinary business;

Banks announcement was never probed or challenged by the official media;

Banks announcements were not queried by the the brokers to the full extent of conversion implications to the balance sheets;

Three components can have a dramatic fast impact on bank core tier 1 capital - equity collapse (not the case - banks shares are down by less than 5% today, plus the statements were released in the morning before market prices were revealed); loans collapse on a massive scale (unlikely, given that both banks guided very recently on new impairments and also unlikely given that both banks appear to be impacted simultaneously); or deposits falling off dramatically (there is no way of confirming this unless banks publish their data, but do recall September-December 2008 when deposits flight exposed Anglo to nationalization).

So something really strange is happening around the BofI and AIB in the last few days. I do not know what this might be, but some fast moving deterioration in hitting banks balancesheets.

For those of you who missed my yesterday's article in the Sunday Times, here it is in un-edited version.SUMMARYNote: updated below for estimated probabilities of default.

In their recent note, Fitch has singled out our massive public deficit and rising debt as the drivers for Irish sovereign bonds downgrade to a lowly AA- rating. This warning was in line with broader international markets concern about the mounting public debt liabilities around the world.

After days of falling prices on Chinese and Greek debts, this Tuesday it was Spain’s turn. October figures from Spain have revealed that the country deficit is now set reaching 9.5% of its GDP. The Spanish Government has gone out of its way to assure the markets that it plans to bring the deficit to 3% Euro zone limit by 2012. The plan involves raising VAT and capital gains tax. But the main measures will deal with public expenditure cut of 12-15%.

Spain, or course, is facing a public deficit that is some 3 percentage points shy of Ireland’s. But, unlike Ireland, Spain is planning to take its medicine in full and swiftly. Take another example. Denmark’s deficit is 7 percentage points below ours. In contrast to us, Danish government passed tax breaks and a major tax reform package encouraging more labour supply. The country also used its pension reserves to boost household income in this recession. To keep things under control – Danes cut public expenditure by up to 20% in some areas.

Latvia, Estonia, Iceland, and Hungary – all have implemented IMF-mandated cuts in public spending with some inflicting cuts up to 30% on public sector wages. All have seen subsequent rounds of upgrades from economic forecasters and bond markets.

But the signs are, after 27 months of severe crises, the Leinster House is still in the denial as to the full realities of our perilous fiscal position. Even after all the tough talk, Minister Lenihan is now appearing to accept Unions’ compromise for a temporary symbolically modest cut to public sector wages. Yet, the depth of our economic crisis requires nothing short of a drastic and permanent reductions in public spending.

Ireland’s promised €4bn cut in the Budget 2010 – contentious as it might seem to us – is pittance compared to what is needed to restore credibility in our economy.

Per latest set of accounts, we are in the need of raising almost a half of our current spending financing through borrowing. The latest forecasts from the EU Commission and the OECD state that Ireland's general government deficit is expected to be 12.2-12.5% of GDP in 2009 and 11.3-14.7% of GDP in 2010-2011.There is no snowball’s chance in hell that Ireland can reach the required 3% target by 2014 or, for that matter 2015, unless we deal with that share of the deficit that is known as structural deficit.

Any deficit arising in real life, therefore, can be decomposed into a cyclical deficit – that share of the deficit that arises due to a temporary recession – and structural deficit. The latter, of course, is the deficit that arises from structural overspending and cannot be expected to disappear when the economy reaches its long run growth potential.

Hence, the extent of our structural deficit is crucially dependent on the assumptions for the natural rate of growth in Irish GDP. So far this year, our Department of Finance forecasters have assumed that the natural rate of growth for Irish economy lies around the simple average for the 2000-2008 levels –close to 3.8% per annum. Their friends in the ESRI are slightly less optimism, predicting that the natural rate of growth is somewhere around 3% of GDP. All of this suggests that the structural component of our deficit is around 8-9% of GDP per annum or under €14bn. The cyclical component is in the region of 3-4% of GDP or up to €7bn. Hence, the current preferred adjustment path to fiscal solvency envisions cuts of €4bn in 2010 and 2011. Thereafter, reckon our mandarins, things will come back to ‘normal’ and Irish economy will miraculously churn out more tax revenue to cover the remaining hole.

But this bet assumes that Ireland is somehow an outsider to the entire Euro area club of smaller open economies. How else can our potential GDP growth be almost 300% above that of Denmark, 250% greater than Belgium’s, 60% above that for the Netherlands and for the Euro area as a whole? Or why should we assume that Irish economy will overshoot potential growth rate in the first year of recovery, when the majority of European economies are expected to reach theirs some 3-5 years after the end of a recession?

If our potential GDP growth is really in line with the small Euro area countries’ average, then our output gap (the difference between the potential and current GDP) is closer to 6% rather than 7.25% that the Department of Finance builds into its forecasts. This in turn implies that our cyclical deficit is around 2.5%, yielding a structural deficit of ca 9.5-10% of our GDP or €16-17bn in 2009 terms.

To get close to a realistically feasible path to solvency, Brian Lenihan should be aiming to cut some €8bn in public deficit in 2010 alone, followed by €3-4bn cuts in 2011 and 2012 each.

This is the real legacy of excessive exuberance with which Bertie Ahearn handed out cash to various Social Partners constituencies. And it is now manifested in purely toxic extent of deficits that cannot be corrected by any means other than savage cuts. The structure of our expenditure – manifested by the fact that some two thirds of it goes to finance wages, pension and social welfare payments – implies that the cuts must happen in exactly these areas.

Painful as this may be, there is simply no alternative. No productivity increases in the public sector will help deflate the actual costs of the sector. The costs that keep on rising. Per CSO’s latest data, 2009 was a bumper crop year for our servants of the state. Average public sector earnings are up 3.2% in a year to the end of Q2 2009, while average private sector wages are down 6.8% over the same time - a swing of 10 percentage points. Survivorship bias – the fact that earnings figures do not reflect the jobs losses and do not net out resulting redundancy payments in the private sector – suggests that the actual earnings growth differential is much wider than that.

Restoration of our economic health at this junction requires swift and significant cut – of the magnitude of 15-20% - in the total pay bill of the public sector. This can only be achieved through a combination of reduced employment and earnings cuts. It should be accompanied by a 10% cut in social welfare and a 30-40% cut in capital spending.

This is an urgent task that cannot be delayed for future Governments to tackle. Since May this year the Government has gone on a PR offensive arguing that the markets have treated Budgets 2009 as serious efforts to correct deficit.

Most of this is political sloganeering. As the chart clearly shows, although markets estimates of our probability of default on sovereign debt have declined in time from a historic peak in February 2009, this decline was far less significant than the overall market gains experienced by other countries with similar budgetary problems. Having peaked well ahead of all other Euro zone countries, Irish CDS spreads have stayed persistently at the top of the common currency area distribution. And there they remain with a significant risk to the upside.

Here are some index pics, all countries CDSs (5-year) set at 100 on 18/07/2008:
And here is an interesting chart for actual CDSs
The markets are now putting estimated probability of our default above that of Peru!

To put these into perspective, using OECD and EU Commission latest forecasts, taking €8bn in deficit financing out this year will save Irish taxpayers some €3-5bn in interest payments alone over the next 5 years.

The costs of our inaction are mounting.

Here are two charts on estimated probabilities of sovereign default for various CDSs, using a linear formula (not a more accurate PV of contingent claim =PV of fixed payment approach and no bootstrapping).
The above chart shows the cumulative probability of default over 5 year term of life of bonds... we are back in double digits and above Spain and Greece...

“Bank of Ireland this morning officially announced its intention to participate in the National Asset Management Agency ... The bank sees the first assets as moving from January 20th 2010, and on a phased basis from there on until mid 2010. The group does not know the discount to be applied to the assets on transfer to NAMA. However, the bank expects to receive €11.2 billion for the assets currently shown with a worth of €16 billion in the balance sheet, based on the 30% discount guided by NAMA. Total provisions set aside on the assets to move to NAMA are €1.4 billion resulting in a €3.4 billion loss. The Risk Weighted Assets will be adjusted down by €15.2 billion as a results of the transfer. The bank shows a loan book of €116.7 billion (down from €131.3 billion pre NAMA) after the movement in assets, while Risk Weighed Assets fall from €100.7 billion to €85.5 billion. Core Equity will fall to €3.5 billion from €6.6 billion. Therefore, the reduction in Core Equity Tier 1 would be from 6.65% in September 30th to 4.2% as a result of the transfer to NAMA, and subsequent write down.”

So to restore the bank balancesheet to internationally acceptable risk-core equity balance of over 6% will require some €2.55bn in capital injection post-Nama, not accounting for any additional deterioration in the remaining book. In a note published exactly a month ago (here) I predicted that BofI will need €2.0-2.6bn in fresh capital – bang on with today’s statement.

This is the second estimate fully confirmed by the Nama-participating banks that is in line with my projections of October 30, with earlier this month media reports putting Anglo’s demand for fresh post-Nama capital at €5.7bn.

Further per Bloxham:

“Loss on disposal of assets will be tax deductible as we understood previously. Bank of Ireland also highlights that after 10 years, in the event NAMA discloses a loss the Minister of Finance may bring forward legislation to impose a special tax on participating institutions. The bank goes on to confirm that the interest rate Bank of Ireland will receive from the bonds which replace the transferred assets, is still not know. Therefore the impact on income is still not known.”

Oh and per Davy's morning note: using average 30% haircut implies a loss of €3.4bn on top of the €1.4bn impairment already estimated at September 30, 2009. This implies - per Davy's model - €960mln pre-tax hit which, "combined with some other adjustments to RWAs and sub-debt... would increase the capital required to keep core equity at the trough of 5% from €1.3bn to €2.3bn."

Now, Davy's model, therefore suggests demand for €2.8bn in capital to 6% ratio. Both Davy estimates are therefore comfortably within my range of expected capital demand by BofI. And good luck to those who have a hope that BofI can raise new funding with 5% core equity ratio at anything close to reasonable costs.

Anyone who at this stage in the game still holds illusions that Nama will allow for a restart of lending in this economy has to be simply bonkers.

Oh, and on a funny side of things: today's CSO data release is for:

"Census of Industrial Production 2008 - Early estimates". One question begs asking: When will the later estimates arive? December 20, 2011?

Oh, and do see this on Ireland v Dubai - here. The worrying thing is that it is talking about partial default scenario for Ireland and the ECB rescue ahead of Greece! which, of course, goes nicely with my article in The Sunday Times yesterday - which I will post later tonight.

Saturday, November 28, 2009

Dubai's impending collapse shows that the epicenter of 'Development on Drugs' model implosion is now finally shifting from the US into Middle East and is risking new wave of contagion into Europe. Most of Dubai development has been financed by petrodollars (domestic and inter-regional), but also via carry trades from Europe (intraregional) with Euro area banks dominating the entire Emirate's landscape in foreign banking. This is bound to have long-reaching impact, with as far on-shore as Irish Nama potentially being possibly saddled with loans cross-linked to Dubai property. Bank of Ireland took part in a $5.5 billion (€3.7bn) syndicated loan facility to Dubai World in June 2008, according to stockbroker Davy. Per report in Irish Times today: "The firm said its initial participation in the facility was $93 million (€62 million) but it is understood that the bank’s debt currently stands at about €50 million."

Am I the only one who noticed that Irish investors, semi-states - e.g Aer Lingus, corporates - see here, even Enterprise Ireland succumbed to Dubai's lure: here - have financed the peak of this bubble?

Oh, and is Nama going to end up holding any of this (more here)? Nama folks are saying they know nothing about the Bad Bank taking on Dubai-related loans... Sure... they would know! And what about cross-linked loans? Developers with dual exposures?

So what does Dubai debacle mean globally?

Start with oil: the only way the Emirates are going to escape a meltdown (with domino effect spreading from Dubai to Abu and so on) is by turning on oil taps. An added incentive here is that while autocratic rulers of the Emirates would not blink twice before saddling Western investors with all debts, the structure of Islamic finance used in Dubai developments implies that although junior debt holders have no explicit guarantees on their debt, Emirates simply will not be able to stomach defaulting on Islamic loans. Oil prices will be under pressure for a long period of time before Dubai's debt mountain is cut to size and this will give support to the weakened dollar on asset demand side of the dollarised carry trades involving commodities.

Bigger question is whether Dubai events might trigger the unwinding of the carry trades. This, of course, depends on the value of UAE currency and the main currency pairs used in the region. In my view, devaluation of massive proportions will be required in the short run, putting pressure on the Euro and, again, aiding the dollar.

Another force acting here will be investor confidence. If Dubai served as an island for divestment out of dollar assets in the region, this island is now fully submerged under financial tsunami. Treasuries are to firm up and dollar alongside these. Ditto for gold.

On a separate note, another net positive (longer term) for the dollar is China. President Obama's visit played out as a play of avoiding the issues of yuan, and yielded absolutely no commitment to revalue Chinese currency. This, strangely enough, implies that once revaluation does take place, it will be much more pronounced and abrupt than if the Chinese authorities were to offer President Obama some concessions this month. Here is why. Absent Chinese commitment to play cooperative game with the US on currency front, Obama Administration will let Europeans put pressure on China through bilateral channels and G20. Europe cannot afford to hold the bag in the global devaluation game as it is exports oriented economy. Developing and emerging economies will fight by imposing capital controls, but EU will have to bring this battle to Chinese shores. Thus, in the long run, the stage is now set for overshooting revaluation of the yuan well above its long-term target and firming up of the dollar.

In the medium term, all this uncertainty about the ultimate rebalancing of the FX markets will be pushing on gold. This is likely to coincide with the emerging markets shocker from Dubai and capital controls impositions, further enhancing demand for the store of value assets such as precious metals. Not to be sensationalist, but if we are at the starting point of Wave II of the crisis (even if it is only a smaller aftermath to the 2008 one), is gold at $1,500-$1,700 oz a possibility?

CSO released Ireland's net investment positions for 2008 yesterday. Full release is available here. My analysis of this data follows:

Table shows outflows of Irish-owned investment from Ireland to foreign destinations (negative values) and the share of each destination in total outflows. Note the significant jump in outflows to the offshore centres, which has risen between 2006 and 2007. It will be interesting to see if this trend – moderated in 2008 – resumes in 2009 in the wake of significant increase in taxation burden in Ireland. Per more detailed breakdown in CSO data, the offshore centres received only a modest share of Irish capital in the form of reinvested earnings, and virtually none in equity purchases, suggesting that most of the outflow to these destinations was in form of business investment and cash.Another interesting feature of this data is that significant outflows continued to the UK in 2008. Margin calls? These related to equity purchases and reinvested dividends and a significant uptick in ‘other capital’ outflows (margin calls covers on buy-to-let and other risky investments covers?).

Over the same period of time, outflow of investments to the US has fallen off the cliff in 2008. Equity purchases in the US peaked in 2007 at almost 5 times the levels of 2006 and then collapsed to a quarter of 2007 levels in 2008. Someone was buying into the top of the bubble in the US stock markets… Meanwhile, reinvested dividends remained relatively stable. Other types of capital have fallen off the cliff from almost €3 billion in 2006 to €746mln in 2007 to €77mln in 2008. Given that the US property prices peaked in 2006, this also suggests that we were buying at the top of the market there.

Table above shows inward investment inflows to Ireland. Negative values imply that foreign investors took out net amount of capital from Ireland. Offshore centres sent in about as much as 40% of the inflows from entire European area. Any alarms ringing at the Financial Regulator’s office? Notice dramatic swing from net inflows to net outflow vis-à-vis Lux and the Netherlands in 2007-2008? Equity and other capital outflows dominated here. Tax optimization in action, especially on capital taxes side.

Amazing figures from the US. Between 2007-2008, a surplus of inward inflows of €15.2bn swings into a deficit of net outflows of €14.6bn – a spread of €29.8bn or 17.4% of 2009 GDP! Interestingly, equity and reinvested earnings were still in net positive in 2008, and going strong, so the massive net outflows were the result of something else. Capital flight? Deposits crunch? Losses taking?

Net deterioration in our inward investment position between 2007 and 2008 was over €31.7bn or -18.54% of our 2009 GDP. Net improvement in our inward investment position between 2006 and 2007 was €13.63bn or +7.97% of our 2009 GDP. Massive volatility even for a small open economy, but what does it tell us about Government's idea that Ireland Inc will be rescued not by our own actions, but by foreign investors coming back to our shores?

The totals suggest that Ireland has bled a massive €36.8bn worth of investments (equivalent to 21.5% of our 2009 GDP) out of the country in 2006-2008 alone. This hardly accounts for the full extent of deterioration in the capital values of the remaining investments by foreigners in Ireland and Irish own investments abroad. But even without taking into account our current crisis, at the peak of our markets valuations in 2006-2007, we were hardly generating much real growth out of our own and foreign investments into the country. Wonder why? Me too.

An interesting paper on labour market published last week provides a good insight into pre-crisis comparatives for Ireland vis-à-vis other Euro area states, the UK and the US. In general, in labour markets, there are processes of job creation and destruction, which are related (but not necessarily perfectly) to workers’ hirings and separations.

Literature on these suggests that “idiosyncratic firm-level characteristics shape both job and worker flows in a similar way in all countries”. But is it so? Do national characteristics matter?

Andrea Bassanini and Pascal Marianna of OECD (IZA Discussion Paper 4452) used cross-country data based on comparable methodologies “to examine key determinants of these flows and of their cross-country differences”. In general, the authors found “that idiosyncratic firm (industry, firm age and size) and worker (age, gender, education) characteristics play an important role for both gross job and worker flows in all countries. Nevertheless, …even controlling for these factors, cross-country differences concerning both gross job and worker flows appear large and of a similar magnitude.”

In summary, “both job and worker flows in countries such as the US and the UK exceed those in certain continental European countries by a factor of two [suggesting much more enhanced worker mobility and jobs creation and destruction in the UK and US]. Moreover, the variation of worker flows …is well explained by the variation of job flows, suggesting that, to a certain extent, the two flows can be used as substitutes in cross-country analysis [in other words – the structures underlying jobs creation and jobs destruction are largely country-specific]. Consistently, churning flows, that is flows originating by firms churning workers and employees quitting and being replaced, display much less cross-country variation.”

You can read the whole paper here, but I will focus on summarizing its findings regarding Ireland. Authors used a limited sample for Ireland (2000-2003), but it was the sample that covered years before the property bubble. In other words, it was a sample closer to the real Irish economy in action, only less pumped up by the steroids of overspending and crazed investment boom.

Table below based on the paper findings, but recompiled by me to illustrate Irish comparatives, shows Ireland as a country with labor markets that are average in their behavior when compared to other developed economies. Contrary to the claims of our political leaders (who painted Irish labour markets as being ‘socially’ focused) and their opposition (who painted Irish labour markets in the hues of cut-throat capitalist competition), we are what we really are – average.

Note: Excess job reallocation is a measure of simultaneous and off-setting job creation and job destructionby different firms belonging to the same group. In other words, excess job reallocation represents thereallocation of labour resources between firms within the same group whereas the group’s absolute netemployment change provides a measure of reallocation across different groups of firms (e.g. differentindustries).

Table above shows probability of worker reallocations (changes in employment status or employer) per annum, probability of reallocation due to excess – excess in jobs turnover over the absolute change in net total employment, probability of new hiring in a year and probability of a layoff or firing (separation). Miracle is – we are very close to an average, even though Ireland was experiencing stronger growth in 2000-2003 than majority of the countries listed in the table.

Another table above shows that in terms of differences between reallocations and excess layoffs, hirings and separations, Ireland is sports a difference from the average only in terms of reallocations net of excess, or that component of the probability of changing work status or employer that is not accounted by movements of jobs within the same sector. In this area we have a higher rate than average, most likely reflective of former ICT sector workers being shifted to new sectors in the wake of the Tech Bubble collapse. Another area of difference relates to hirings in excess of separations, which implies that Irish economy was net additive of new jobs at the time at a strong rate. All other parameter readings are average.

So for a pictorial representation next. Higher worker reallocation rates – similar to other growth economies of Denmark, Finland, Spain, UK and US. Similarly higher excess worker reallocation. Slightly above average hirings rates and average separations.

And as far as differentials go:

Below average excess less hiring reasons for reallocations, slightly above average excess less separations (jobs destruction was rather weaker in Ireland in this period than in the average economy in the sample) and above average hirings less separations – again for the same reason of rising jobs creation.

So what about ‘gender issues’ in the workforce? Surely here we have lots of ground to gain as our Irish Times pundits on economy have been busy shouting about various gender gaps and glass ceilings?

Well, as far as hiring rates by gender go, we are below average for both men and women, and remarkably, there is no difference evident by gender whatsoever. The only other country with such levels of hiring ‘glass ceilings’ is… Sweden. That said, our overall mobility due to hiring was a bit weaker than the average. But not by much.

Separations by gender? Do evil capitalists fire women more frequently than men in Ireland?

Yes, rates of separation from employer for women were in excess of those for men in Ireland, but both rates were below the group average and the differences across gender lines were less pronounced in Ireland than in… Sweden, Norway, Finland, Denmark, and Switzerland. Either these countries are even more sharkish capitalist economies or there is no evidence of Ireland’s labour markets being much tougher for women then for men.

Chart above shows that in terms of gender imbalances in reallocation rates by gender, Ireland was in the below-average tier of the sample countries. And that mobility gap between men and women was smaller than the one found in many other social(ist) democracies of our Europa Land. Average we were in this category as well.

If there was no real need for a radical Government intervention to protect Irish women from sharp labour market practices of employers, what about the famous age gap? May be here there we find a smoking gun?Not really. All age groups in Ireland saw similarly below average rates of mobility due to hirings. And overall age gap was similar as that of the average economy. Nothing dramatic happened here, folks.

Nor were our separation rates by age category drama-filled either. Below average – reflective of tighter labour markets in general and employers’ desire to hold on to workers in the age of rising wage inflation. Only the older cohort of workers experienced more jobs turnovers than average, and then not by much. For a much younger society than our peers this suggests that there was hardly a difference by age in separations after all.

Worker reallocation rates by age – same story.

Now, we’ve all heard about our marvelously educated labour force. With so much education, would Irish economy treat various education cohorts differently in the labour market? Afterall, a handful of less educated workers would really stand out in the sea of excellence that is Ireland Inc’s workforce.

Alas, the rates of hirings were below average in Ireland for all education groups, ecept highly educated. Now, here is a strange thing – if we had a highly educated labour force then, this would imply diminishing demand for such oversupplied ‘commodity’. In turn, demand rocketed. Either we all were working for high-education-intensive companies (MIT Media Labs?) or our ‘high’ levels of education were just average in quality/quantity…

Separations tell the same story – these are movements of workers out of jobs and they are… below average for highly educated and average for medium educated and low for low educated. People seemed to have been relatively happy to hold their jobs.

And so on to reallocations rates:

Below average for all…

And so, positing a question: in 2000-2003, were Irish labour markets closer to Boston or to Berlin? The answer, alas would be a disappointing neither. We were, in fact, closer to that inextant Kingdom of Average. Time to stop class warfare?

Friday, November 27, 2009

Eurocoin - a leading barometer of future economic activity in the Eurozone - increased to 0.55 in November, the third positive reading in a row up from 0.33 in October. The reading points to an underlying growth in the Euro area of slightly above 2% on a annual basis. Gains have been led by consumer and business confidence as the main drivers, the stock market and industrial production contributed to a lesser extent. We are now back to H2 2007 level in Eurocoin reading.

So here is the forecast, as promised:Notice that my forecast assumes ca 1.1% growth q-o-q in Q4 2009 and a dip to ca 0.3-0.4% in January 2010. Not a W, but a moderation nonetheless, driven primarily by what I believe will be a very weak Christmas season across Europe. In Ireland, as always there is an issue of extreme volatility in growth, but I will be watching Christmas sales for signs of serious weakness - there is a distinct possibility of large shut downs on retail and restaurants trade side the other side of holidays into January. Let's hope I am wrong (and I have been wrong in the past - my previous forecast for Q3 2009 Euro area growth was -0.5-1% and it came out at a 0.8 percentage points swing from my closer end of the estimate).

On a less economic side of news:

EU Commissioner for Internal markets for the next 5 years will be one French MEP Michel Barnier. Barnier will take portfolio with responsibilities for financial services. Barnier had so far distinguished himself as trade protectionist with strong opposition to the so-called 'Anglo-Saxon' model of economic development. That is to say he is firmly in favor of rules-based regulation of financial services. This is a net negative development, as currently Brussels is in the process of drafting a massive volume of regulations relating to financial services and such a process of reform requires a very balanced and sector-specific approach. Barnier is hardly fulfilling such a description. On July 28 this year, Le Monde (Barnier's home paper) described the possible appointment of Barnier to the Internal Markets portfolio as equivalent to "entrusting the surveillance of a chicken coop to a fox".

Why a chicken coop & fox analogy? Not because Le Monde is that much concerned over Barnier's credentials as over-regulation driven finance tsar, but because Barnier will be running financial sector across the EU at the time when President Sarkozy has a clearly defined (and publicly expressed) objective to make Paris a bigger financial services centre than London. It will be interesting to see how the battle between Barnier-the-European-Federalist and Barnier-the-French-Politico will be unfolding.

Forbes reports (here): "One former official who worked with Barnier said: 'He has always been very close to the French conservatives. He was close to Chirac and now he is close to Sarkozy. He will know that he is in that position thanks to Sarkozy.'"

If there is any more to add here it is that Barnier was Minister for Agriculture in France between 2007 and 2009 - a post that saw him preside over the most subsidised, most protected and least 'common market' of all sectors in Europe in a country that holds second place only to Ireland in per-farmer subsidies. He now will oversee the most mobile and least protected sector across the EU. Spot the irony...

And since we are on news digest - here is the story that caught my eye. This goes to heart of the debate as to what makes a state a pariah state. After all, Soviet Union used in place its Nobel Prize winners into exile or under house arrest in a remote city closed-off to the rest of the world, it even forced one to turn down his Nobel Prize, but stealing it away from a person? New low for the state that the West is courting with bouts of friendly rhetoric. And what an irony for the Nobel Peace Prize Committee, which awarded President Obama's prize this year in part for his renewing dialogues with rogue states like... Iran (here)...

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This blog represents my personal views and is not reflective of the views or opinions held by any company, contractor, client or employer I work for currently or have worked for in the past. These views are not an endorsement to take any action in the markets or of any political position, figures or parties.

“It is not true that people stop pursuing dreams because they grow old, they grow old because they stop pursuing dreams.” Gabriel Garcí­a Márquez

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"Getting worse more slowly is not the same as getting better", Prof. Brad DeLong